Hedge fund firms excited by prospect for alpha in 2023

Hedge fund managers see abundant opportunities in 2023, after successfully navigating a volatile environment for global markets and rough conditions in 2022 fairly well.

Bridgewater Associates LP, Westport, Conn., is "well prepared" for 2023 market conditions, said Robert Prince, co-chief investment officer, in an interview.

"Our positions in 2022 reflected higher inflation from monetary tightening in more of a move to a downturn in the economy," Mr. Prince said.

As for 2023, Mr. Prince said "we think we're entering a stagflation environment with high inflation. Central banks can't simultaneously deal with high inflation and economic growth. Banks will try to ease to create growth and tighten to bring down inflation."

However, a period of higher volatility is "a good environment for alpha generation and provides opportunities. More alpha can help to mitigate negatively correlated asset classes," Mr. Prince said.

Bridgewater managed $150 billion in assets as of Dec. 1.

Many hedge fund managers thrived amid the turmoil last year, caused by high inflation and a subsequent shift by central banks to a more hawkish stance and rising interest rates.

Among the best hedge fund strategy performers in 2022 were global macro, systematic trend and managed futures strategies, industry sources said.

What's likely in 2023 is more of the same environment as last year, said Jonathan M. Caplis, CEO of New York-based hedge fund consultant PivotalPath Inc., in an interview.

"Higher interest rates, especially on the short end of the curve, will be a tailwind for managed futures and ditto for long/short equity strategies with significant short books," he said, adding "liquidity will be valued again, with futures, macro and equity strategies benefiting."

"Global macro hedge funds did very well as they were uncorrelated with equity markets and conversely were up when equities were going down in 2022," said Kenneth J. Heinz, president of HFR Inc., Chicago.

"Macro is what institutional investors are investing in now because there is more dispersion between managers compared to other hedge fund strategies. When the market is down, macro tends to be up," Mr. Heinz said, adding that macro strategies likely will continue to perform well in 2023.

In fact, HFR's reporting of hedge fund returns in the year ended Dec. 31 showed that the HFRI Macro (Total) index was the only one of the four hedge fund indexes HFR maintains that had a positive return over the 12-month period, up 9.31% compared to 7.72%, as of Dec. 31, 2021.

Of the three other HFR hedge fund indexes, the HFRI Relative Value (Total) index was down 0.9% as of Dec. 31, compared to 7.59% in 2021; the return of the HFRI Event-Driven (Total) index was -5.04% at year-end 2022 vs. 12.41% the prior year; and the return of the HFRI Equity Hedge Total index was down 10.37% in 2022 in contrast to 11.67% in 2021.

The broad HFRI Fund Weighted Composite index was down 4.25% for the year ended Dec. 31 in contrast to 10.16%, HFR's data showed.

The previous year "was quite a good one for hedge funds and alternative investment strategies," said Jordan Brooks, co-head of macro strategies at AQR Capital Management LLC, Greenwich, Conn., in an interview.

In 2023, Mr. Brooks expects macro strategies to do continue to do well, noting that "markets are pricing 2023 based on the expectation of a Goldilocks environment," he added.

"Markets seem complacent and are pricing in a very benign environment in 2023, including a smooth, swift disinflation, relatively lower interest rates, accommodative central banks and lower volatility," he said.

AQR managed a total of $100 billion as of Sept. 30.

Systematic trend specialist manager Aspect Capital Ltd., London, posted a strong year in 2022 and is likely to do well in 2023, said Martin Lueck, co-founder and research director.

"Uncertainty is something we haven't seen for a long time. Uncertainty creates opportunities for trend followers. The monsters under the bed, the table, etc., aren't going away in 2023. We're likely to see diverse inflation environments globally and we are beginning to see structural weaknesses in areas like special purpose acquisition companies and real estate to take advantage of," Mr. Lueck said.

"We designed our portfolio for this kind of environment," Mr. Lueck said.

Among the opportunities Aspect sees are divergent reactions to inflation globally; higher interest rates; geopolitical tensions; and energy shortages in Europe, all amid a backdrop of deglobalization, Mr. Lueck said. Aspect managed $10 billion as of Dec. 1.

Bryan Smith, Seattle-based head of BlackRock Alternative Advisors who oversees the firm's hedge funds-of-funds business, said in an interview that the company's approach in 2022 worked well for the firm's investors because "in general, hedge funds protected the downside and offered diversification in 2022. They did what they were supposed to do."

Among the strategies the funds-of-funds team is considering for investment in 2023 are volatility arbitrage, fixed-income value and relative value, Mr. Smith said.

BlackRock managed a total of $29 billion in hedge funds-of-funds as of Sept. 30.